The Fed: Damned If They Do

FROM FORBES.COM

Here's how the Fed's proposal works: For subprime loans, the plan prohibits lending without a thorough review of the borrower's ability to repay. Lenders cannot make loans based on unverifiable assets, and they would be required to establish an escrow account to pay for property taxes and insurance. In addition, only certain subprime loans would be subject to prepayment penalties, which have left many borrowers stuck with exceptionally high mortgage payments.

For any mortgage loan secured by a borrower's primary home, the Fed's plan prohibits lenders from paying mortgage brokers fees to steer borrowers into high-rate loans. It also prohibits brokers from encouraging appraisers to misrepresent a home's value and requires loan advertisements to be more up front: If a loan has a "teaser" rate that expands into an inflated, fixed rate, the ad must say so.

It comes on the heels of a White House plan, announced nearly two weeks ago, that freezes the "teaser" rates on some subprime loans. That plan has been widely criticized for not doing anything to help borrowers who were already in distress.

The Fed’s plan isn’t designed to help those who are already in foreclosure--the central bank doesn’t have the jurisdiction to do that. And there’s still a three-month comment period that must pass before the modified Fed regulations can take effect.

"What the Fed has done is an important first step," says Kurt Eggert, a law professor at Chapman University in Orange, Calif., and a member of the Fed's Consumer Advisory Council. "If this step had been taken five years ago, we may have avoided the subprime meltdown."

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